Turbulent markets may rattle investors, but they don't slow down excellent companies making potentially massive deals. And Lottery.com (NASDAQ: LTRY) just made two. First, LTRY announced inking a significant brand awareness deal with T-Mobiles' Marketing Solutions business to become the exclusive digital lottery brand for in-vehicle advertising, reaching audiences through video ads presented on screens inside ride-share vehicles. In a second deal, LTRY announced selecting Algorand's innovative blockchain to support the development of its Project Nexus, a blockchain-based gaming platform being developed by Lottery.com to operate lottery and other forms of online gaming worldwide with enhanced security, scalability, and speed. Both deals add substantial value. Not only that, they accelerate LTRY's penetration the $430 billion lottery market, meaning Lottery.com and its investors could be holding a winning ticket.
In fact, investor response to the news was excellent, with shares rising nearly last week before political unrest reigned in prices of growth stocks across the board. Still, what investors need to remember is that while the stock may have given back some of its impressive gains, the news has enough accretive impact to be back in focus once broader market sentiment improves. Hence, the decline, likely short term, presents an opportunity that may be short-lived. Frankly, with markets turning green on Friday, that window of opportunity may be closing even faster than expected.
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Reasons To Like Lottery.com
Of course, there are already plenty of reasons to justify a closing of the valuation disconnect. For one, its new exclusive agreement with T-Mobile to reach a technologically-savvy, captive, and targeted audience, which already demonstrates high engagement and conversion rates, adds more firepower to an already compelling LTRY value proposition. Not only that, its new deal with Algorand can be significant, too, and shows LTRY understands the importance of being a next-gen provider. They were also wise in their choice, selecting Algorand to help secure and protect its competitive position in a substantial gaming market expected to migrate to the blockchain due to its inherent transparency. The intent is to leverage Algorand technology to add a combination of high efficiency, low-latency, scalability, and security to its Project Nexus platform. Both deals are value drivers.
In addition, LTRY's strategic moves are happening at the right time and in the right market. In 2021, only about 7% of lottery tickets were sold online. And in a $430 billion market that leaves room for exponential growth. The good news there- LTRY is on a mission to attack that opportunity by targeting an online lottery ticket sales market that reached $2.3 billion last year. But that was 2021. The new year is expected to add nine new states to the online lottery market, resulting in an appreciable multiple likely added to an already lucrative revenue-generating opportunity.
Here's another thing to know. The current $2.3 billion sales opportunity represents the U.S opportunity. Worldwide, online ticket sales are expected to eclipse $14.5 billion by 2026. And while currently focused on the U.S. markets, don't think international expansion isn't on the minds of LTRY management. It is. In fact, they have made clear their intention to become the preferred, trusted, and most credible marketplace for legally available games to a global players market. That means plans to sell into a market 530% higher than its current is already in the queue.
Buying Into A Disconnect
That's not all. What's good for LTRY is likely good for its investors. And at current share prices, the opportunity to tap into a disconnect between share price and intrinsic value has never looked more attractive. In fact, the recent decline in LTRY shares looks to have more to do with sector weakness in wagering sites like DraftKings Inc. (NASDAQ: DKNG) and BetMGM (NYSE: MGM) than anything company-specific.
Actually, that presumption has merit, noting its Q3 filing has provided more reasons than not to pay close attention to the developing LTRY story. Part of the bullish proposition is built around LRTY scoring over $32 million in revenue, a more than 1900% surge over the same period last year. Not only that, gross profit followed that lead, reaching more than $20 million in the same period. Yes, revenues included a $30 million affiliate marketing transaction not in place last year. But, that money will be put to work intended to create more income than they spend. So while the comp may be a tough beat, considerable growth is still in play. And that's what they should get.
Keep this in mind, too. Organic growth isn't lacking, either, proven by revenues jumping by 38% compared to last year. That contributed to Net Income skyrocketing from a $1.2 million loss to a positive $11.2 million in the comparable period. Again, that $30 million was included. Still, adding a massive marketing budget to impressive organic growth isn't something to look past. Instead, many view the package as the fuel to support a revenue-generating tailwind to drive substantial growth for LTRY this year.
Actually, LTRY guidance supports that assumption. Bullish commentary during their previous results call suggests that 2021 will close its books with more than $71 million in revenues with high-margin support. The more excellent news is that they expect the revenue-generating momentum to continue in 2022, with LTRY guiding revenues to track higher as its platform attracts new users. With T-Mobile now in the mix, that can happen even faster than initially planned. For investors still on the fence, here's some news that may tip them to the long side of the trade. State regulators may become an ally in helping LTRY create significant shareholder value. How can LTRY benefit? By coasting along with a friendly legislative tailwind that could expedite expansion into at least nine more states in 2022.
Remember, too, the "iLottery" market is gaining share in a climate where consumers are turning toward digital shopping alternatives more than ever before. And that shift in purchasing patterns isn't only about clothing, spirits, and food. Consumers are going digital for just about anything with a price. Lottery ticket sales included, and the more states that offer the option, the bigger the opportunity for LTRY.
Thus, from an investor's perspective, LTRY stock shouldn't be lower. Instead, by doing the right things at the right time, LTRY should be attracting the attention of growth stock investors that want exposure to a massive global market opportunity. The case for LTRY is made stronger by proving it can decouple from broader market weakness as investors search for quality growth stock investments in safe-haven sectors offering insulation from the more overall volatility. Price action on Friday shows that's the case.
Hiding Is Not An Effective Strategy
Indeed, hiding from volatility isn't a very compelling investment strategy; taking advantage of opportunities is. Lottery.com is one of those in play. That's not surprising, though. LTRY has effectively created shareholder value by leveraging the power of a best-in-class platform providing seamless user services as a means for LTRY to accelerate growth by penetrating new markets faster than most of its competitors. Beyond being quick to market, LTRY also knows what to do once there.
Once approved to sell, LTRY acts independently of state lottery authorities and provides registered users access to legalized lottery games, either on the website or through its app. But it's more than just access. LTRY takes things a big step further by physically printing and securing purchased tickets on behalf of the user. Perhaps the better part of the platform from a residual revenue-generating perspective is that users don't have to withdraw winnings. Instead, they can be left in their accounts to use for other lottery games. Since LTRY makes money by selling tickets, having those balances, or at least a portion of them, inevitably drives additional sales, generates user loyalty, and most importantly, earns LTRY a commission. It's a vital part of the revenue-generating strategy.
Here's a more significant incentive for users to join Lottery.com- the company never takes a penny of a player's winnings. Instead, LTRY's revenues are based on a "concierge" service fee charged to transactions. Those fees range from $0.50 for purchasing a $1 lottery game to $1 for a $2 lottery game like nationally popular MegaMillions. But that one-time initial fee is the most expensive part of the purchase. Other games entered in the same transaction are charged a flat 6% fee at face value. Thus, a user buying five $2 tickets in one transaction won't pay $5.00 in fees but instead about $1.48 in total, keeping the fee structure quite reasonable. Moreover, it's keeping users engaged.
That's shown in a recent filing indicating that the average gross profit per user in 2020 was roughly $17.20. And while 2021 was a break from everything ordinary, expectations are for the sector, and LTRY, to see online purchasing trends increase. And with LTRY earmarking $30 million toward marketing, that trend can be a friend.
Printing Tickets Is A Winner, Too
The more excellent news for LTRY and its investors is that revenues should push significantly higher as users stay engaged with the LTRY platform. That's happening, with LTRY reporting that the average number of user transactions jumped from 11.2 to 12.4 compared to the same period last year. Not only that, an increase in tickets per transaction generated a corresponding spike in revenue per transaction by 16%, met by gross margins sending more dollars toward the bottom line.
More good news on the revenues front is that LTRY plans to launch proprietary iGaming products separate from its state lottery interests. Notably, by targeting additional billion-dollar market opportunities, revenues from that mission can be substantial. And with savvy investors buying forward-looking expectations, it may be wise to position ahead of updates on that initiative. After all, good news can help ignite a rally of significant proportions when dealing with a market that size.
Also, as noted, don't ignore the fact that significant revenue-generating firepower is being added to the LTRY investment proposition exploring a blockchain platform that they call "Project Nexus." Now, with Algorand on board, the intent is to accelerate penetration into the broader iGaming industry by integrating digital tickets, sweepstakes, and enhanced API capabilities into its services. Again, just as news from its iGaming initiative can inspire a rally, so can an update of this potentially lucrative endeavor.
Keep in mind shares did react favorably to the news of adding Algorand, but fighting against headlines of an escalation of unrest in Europe quieted those increases. Still, expect both of last week's updates to stay in investors' minds when bullish sentiment returns to the markets. Thus, a bump, much-deserved, higher is likely.
A Valuation Disconnect Likely To Close
It would make sense for that to happen. At the end of the trading day, most apparent to the LTRY investment proposition is that its stock is disconnected from a valuation more appropriate to what they have already done and is about to do. Moreover, LTRY has justified its case to move appreciably higher and even provided a roadmap of reaching its ambitious goals in the coming weeks and quarters.
Part of that near-term surge can be generated from LTRY being in the right markets at the right time. Indeed, LTRY is. And remember, with only about 7% of the current U.S. lottery market played online, LTRY is in an enviable position to capture a substantial share of a market in its relative infancy with a dominant expectation for near-term exponential growth. A quick side-note- if online lottery follows in the footsteps of online sports wagering, the online lottery sector will experience more than rapid adoption; the revenue-generating opportunities for service providers will be off the charts.
How fast can that happen? Well, if online wagering is a fair comparison, not long. In pretty short order, online wagering has earned the lion's share of a multi-billion dollar market, with recent data scoring that share at roughly 82% of wagers made.
Can an online lottery match that pace? Many say yes. And that position is supported by the expectation of online lottery ticket sales doubling over the next few years. That means companies well-positioned today and making plans for their future can meaningfully outperform those not paying attention to changing markets. Lottery.com is on the right side of that list. Moreover, with the assets, platforms, and management to make 2022 a breakout year, Lottery.com is more than an attractive investment proposition; it's a compelling one.
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